Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

I investigate special situations, pairs, and index rebalancing trades in Korea.

Korea / Special Sits, Pairs, Index Rebalancing

GS Merger Arb: Let's Capitalize on a Potential Arb Yield Spike on KOSDAQ 150 Rebalancing (June 28)

GS Retail Merger Swap Arb Yield Currently at 4.27%: Trade It Now Rather than Later

GS Retail Merger Swap Arb Trade Begins This Monday

GS Retail Merger Arbitrage: Yield Back at +6% & Local Arb Traders in Action

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<h2>Merger arbitrage yield</h2><p>The merger arb yield currently stands at 5.86%, excluding transaction costs, as I'm writing this post (10:30 AM in Korea local time). You buy a GS Home Shopping share for the current price of ₩156,400. Then, you short 4.22368 GS Retail shares for the current price of ₩165,568 (₩39,200 x 4.22368). Your one GS Home Shopping share will be converted into 4.22368 GS Retail shares to cover your short position.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Spread - swap"}'>Spread - swap</td>
<td style="text-align: center;" data-sheets-value='{"1":2,"2":"Acquirer"}'>GS Retail - Acquirer</td>
<td style="text-align: center;" data-sheets-value='{"1":2,"2":"Target company"}'>GS Home Shopping - Target company</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Current price"}'>Current price</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":39200}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula='=googlefinance(Terms!R[2]C[0], "price")'>₩39,200</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":156400}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula='=googlefinance(Terms!R[5]C[-1], "price")'>₩156,400</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Swap price"}'>Swap price</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":33800}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=Terms!R[7]C[0]">₩33,800</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":142762}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=Terms!R[13]C[-1]">₩142,762</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":" - x Swap ratio"}'>- x Swap ratio</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":165568.38927999997}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-2]C[0]*Terms!R[15]C[0]">₩165,568</td>
<td style="text-align: center;" data-sheets-value='{"1":3,"3":156400}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-2]C[0]">₩156,400</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Spread"}'><strong>Spread</strong></td>
<td colspan="2" rowspan="1" style="text-align: center;" data-sheets-value='{"1":3,"3":0.058621414833759426}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-1]C[1])/R[-1]C[1]"><strong>5.86%</strong></td>
</tr>
<tr><td colspan="3" rowspan="1" data-sheets-value='{"1":2,"2":"Source: DART &amp; KRX"}'>Source: DART &amp; KRX</td></tr>
</tbody>
</table><p>The arb spread went south as low as 4.59% this Monday, then bounced back to 5.86% today.</p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/210/638/original/GS+Retail+%26+GS+Home+Shopping+merger+swap+arb+yield+%281%29.png?1622597895" class="editor-image img-responsive" data-smartkarma-image-id="210638"></figure></section><h2>Remaining schedule</h2>
<p>Last Friday had an EGM for both companies to get shareholder approval on this merger. GS Retail got a 98.47% approval rate of the attending votes. GS Home Shopping got a 78.5% approval of the attending votes. Both companies met the approval requirements: 1. two-thirds of attending votes and 2. one-thirds of all voting votes.</p>
<p>Now, we are in the middle of the appraisal rights exercise period. It began last Friday and will run until June 29. Then, we will see a trade suspension on GS Home Shopping from June 29 to July 15. The listing of new shares will hit the market the following day, on July 16.</p>
<table class="table table-striped">
<colgroup>
<col width="200">
<col width="200">
</colgroup>
<tbody>
<tr><td colspan="2" rowspan="1" data-sheets-value='{"1":2,"2":"Timetable"}'>Timetable</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Shareholder meeting"}'>Shareholder meeting</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44344}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'>2021. 5. 28</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Stock purchase right exercise (GS Retail &amp; GS Home Shopping)"}'><strong>Stock purchase right exercise (GS Retail &amp; GS Home Shopping)</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"2021. 5. 28 ~ 6. 29"}'><strong>2021. 5. 28 ~ 6. 29</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Trade suspension (GS Home Shopping)"}'>Trade suspension (GS Home Shopping)</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"2021. 6. 29 ~ 7. 15"}'>2021. 6. 29 ~ 7. 15</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Listing"}'><strong>Listing</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44393}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'><strong>2021. 7. 16</strong></td>
</tr>
<tr><td colspan="2" rowspan="1" data-sheets-value='{"1":2,"2":"Source: DART"}'>Source: DART</td></tr>
</tbody>
</table></section><p>The only risk to a merger arb trade at this point is a cancellation resulting from the stock purchase cost. A combined ₩350B is the limit that GS will consider canceling the merger. We still have about a month to go. But given the substantially negative spread at this point, the cancellation risk should be pretty minimal.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Spread - stock purchase"}'>Spread - stock purchase</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Acquirer"}'>GS Retail - Acquirer</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Target company"}'>GS Home Shopping - Target company</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Current price"}'>Current price</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":39200}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-35]C[0]">₩39,200</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":156400}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=R[-35]C[0]">₩156,400</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Exercise price"}'>Exercise price</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":34125}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=Terms!R[-16]C[0]">₩34,125</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":138855}' data-sheets-numberformat='[null,2,"[$₩-412]#,##0",1]' data-sheets-formula="=Terms!R[-15]C[-1]">₩138,855</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Spread"}'><strong>Spread</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-0.12946428571428573}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-40]C[0])/R[-40]C[0]"><strong>-12.95%</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":-0.11218030690537084}' data-sheets-numberformat='[null,3,"0.00%",1]' data-sheets-formula="=(R[-1]C[0]-R[-40]C[0])/R[-40]C[0]"><strong>-11.22%</strong></td>
</tr>
<tr><td colspan="3" data-sheets-value='{"1":2,"2":"Source: DART &amp; KRX"}'>Source: DART &amp; KRX</td></tr>
</tbody>
</table>

Merger arbitrage yieldThe merger arb yield currently stands at 5.86%, excluding transaction costs, as I'm writing this post (10:30 AM in Korea local time). You buy a GS Home Shopping share for the current price of ₩156,400. Then, you short 4.22368 GS Retail shares for the current price of ₩165,568 (₩39,200 x 4.22368). Your one GS Home Shopping share will be converted into 4.22368 GS Retail shares to cover your short position.







Spread - swap
GS Retail - Acquirer
GS Home Shopping - Target company


Current price
₩39,200
₩156,400


Swap price
₩33,800
₩142,762


- x Swap ratio
₩165,568
₩156,400


Spread
5.86%

Source: DART &amp; KRX

The arb spread went south as low as 4.59% this Monday, then bounced back to 5.86% today.Remaining schedule
Last Friday had an EGM for both companies to get shareholder approval on this merger. GS Retail got a 98.47% approval rate of the attending votes. GS Home Shopping got a 78.5% approval of the attending votes. Both companies met the approval requirements: 1. two-thirds of attending votes and 2. one-thirds of all voting votes.
Now, we are in the middle of the appraisal rights exercise period. It began last Friday and will run until June 29. Then, we will see a trade suspension on GS Home Shopping from June 29 to July 15. The listing of new shares will hit the market the following day, on July 16.






Timetable

Shareholder meeting
2021. 5. 28


Stock purchase right exercise (GS Retail &amp; GS Home Shopping)
2021. 5. 28 ~ 6. 29


Trade suspension (GS Home Shopping)
2021. 6. 29 ~ 7. 15


Listing
2021. 7. 16

Source: DART

The only risk to a merger arb trade at this point is a cancellation resulting from the stock purchase cost. A combined ₩350B is the limit that GS will consider canceling the merger. We still have about a month to go. But given the substantially negative spread at this point, the cancellation risk should be pretty minimal.







Spread - stock purchase
GS Retail - Acquirer
GS Home Shopping - Target company


Current price
₩39,200
₩156,400


Exercise price
₩34,125
₩138,855


Spread
-12.95%
-11.22%

Source: DART &amp; KRX



GS Retail

GS Retail Merger Index Treatment